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INTERSTATE COMMERCE LEGISLATION 


INTRODUCTION 

TO 

CLARK ON INTERSTATE COMMERCE 


By 

FRANCIS B. JAMES 


[Manuscript Copy for Private Circulation] 








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Interstate Commerce Legislation 


INTRODUCTION 

TO 

CLARK ON INTERSTATE COMMERCE 


By 

FRANCIS B. JAMES 7 

Chairman Committee on Commerce, Trade and Commercial Law of the American 
Bar Association. 



1919 

John Byrne & Company 
Washington, D. C. 




Copyright 1919 

JOHN BYRNE & COMPANY 
WASHINGTON, D. C. 



APR 



©CI.A5L5304 ^ 


AM) ^ 


PUBLISHER’S PREFACE. 

The undersigned have published a volume in cloth bind¬ 
ing entitled “Clark on Interstate Commerce” containing the 
testimony given by Hon. Edgar E. Clark (a member of the 
Interstate Commerce Commission) before the Senate Com¬ 
mittee on Interstate Commerce pertaining to proposed in- 
erstate commerce legislation with an Introduction by 
Francis B. James (Chairman of the Committee on Com¬ 
merce, Trade and Commercial Law of the American Bar 
Association) together with the Pomerene-Esch Bill and an 
index to Mr. Clark’s testimony. This pamphlet in paper 
cover is a reprint of said “Introduction” and is a manuscript 
copy for private circulation. 

John Byrne & Company. 
Washington, D. C., April 21, 1919. 












































1 















y 















CONTENTS. 


Page 

(a) Preliminary. 1 

(b) The Keynote . 2 

(c) A New Jurisprudence. 3 

(d) Extent of Regulation . 4 

(e) Complete Merger in Time of War. 4 

(f) Unnecessary Road Building . 4 

(g) Power to Require Railroads to Extend Their 

Lines. 5 

(h) Fair Wages a Proper Factor in Rate Making. ... 5 

(i) Wages and Conditions of Employment. 5 

(j) Uniform Depreciation Charge . 5 

(k) Mileage Scales and Grouping. 5 

(l) Initiating Rates . 6 

(m) War Expenses . . ^. 6 

(n) Merger of Carrier Lines. 8 

(o) Common Use of Equipment . 10 

(p) Obligation to Furnish Equipment. 10 

(q) The Private Freight Car. 10 

(r) Motive Power . 11 

(s) Standardization of Equipment and Motive Power 11 

(t) The Common Use of Terminals . 11 

(u) Supervision of Service and Physical Operation. . 12 

(v) Minimum Rates . 12 

(w) Issue of Securities. 13 

(x) Control of Expenditures. 13 

(y) Interlocking Directors . 13 

(z) Adequate Revenue . 13 ’ 

(z-1) Pooling of Freight and Division of Earnings . . 14 

(z-2) Competitive and Non-Competitive Traffic. 17 

(z-3) Transit. 17 

(z-4) Rail and Water . 17 

(z-5) Routing. 18 

(z-6) Federal and State Commissions. 18 

(z-7) The So-Called Weak Roads,. 19 

(z-8) Modernizing the Machinery of the Interstate 

Commerce Commission . 52 
































Contents — Continued . 


Page 

(z-9) Interpretation, Construction and Application of 


the Act .,. 55 

(z-10) Interpretation, Construction and Application 

of Publications . 59 

(z-11) The Pomerene-Esch Bill. 59 

(z-12) In Conclusion. 60 






INTERSTATE COMMERCE LEGISLATION 


INTRODUCTION 

TO 

CLARK ON INTERSTATE COMMERCE 

(at) Preliminary. 

The world conflict has come and gone, and during 
that trying period the United States Government, as a 
war measure, has largely conducted the country’s trans¬ 
portation. The actual experiment of Government oper¬ 
ation has generally crystalized public sentiment against 
it as a permanent policy, and against its continuation 
for even five years after a formal proclamation of peace. 

The period of thirty-two years since the approval by 
the President on February 4, 1887, of the Act to regu¬ 
late commerce, has been rich in experience, and has 
demonstrated that in view of both old and new economic 
conditions, amendatory and supplemental legislation should 
be enacted before the return of interstate common carriers 
to private ownership and operation. 

Many plans have been submitted to the Senate Com¬ 
mittee on Interstate Commerce by both the biased and 
unbiased, the leading among the former being the As¬ 
sociation of Railway Executives and the National As¬ 
sociation of Owners of Railway Securities, and the chief 
among the latter being Hon. Edgar E. Clark, a member 
of the Interstate Commerce Commission for a dozen 
years past. His testimony is so disinterested and the 
fruit of so long an experience that it comes more nearly to 
being a guide for future legislation than that of any other 
witness. The insinuation contained in the questions put 



2 


by a former Senator from Illinois (pages 372-373)* in¬ 
stead of weakening has only added weight to Mr. Clark’s 
statements. 

(b) The Keynote. 

One note that rings sharp and clear throughout 
Mr. Clark’s testimony as to transportation (and which 
is resounding throughout the economic world as to all 
other economic activities) is that both cooperation and 
consolidation on the one hand and competition on the 
other must be limited, controlled and regulated in order 
that the good of each shall be preserved and the bad 
destroyed. Unregulated, uncontrolled and unlimited 
cooperation and consolidation are harmful to the pub¬ 
lic weal, while controlled, regulated and limited coop¬ 
eration and consolidation are in the public interest. 
Uncontrolled, unregulated, and unlimited competition 
of itself tends toward either monopoly or bankruptcy 
and is wasteful and not for the general welfare, while 
controlled, regulated and limited competition is eco¬ 
nomically sound and to the benefit of the whole social 
fabric including therein the economic element. This ap¬ 
pears from the following colloquy, p. 254) : 

“Senator Watson: * * * Mr. Commissioner, 

as I understand the report of the Commission, you 
are in favor of the elimination of all competition; 
is that right? 

“Commissioner Clark: Except the competition 
of service. 

“Senator Watson: How do 1 you distinguish be¬ 
tween ‘competition of service’ and other kinds of 
competition if you would have the railroads oper¬ 
ated as a unified whole? 

♦Page references are to the pages of Mr. Clark’s testimony as same 
appears in the official report of hearings before the Senate Committee 
on interstate Commerce. 



3 


“Commissioner Clark: Our suggestion is not so 
complete a unification as exists at the present mo¬ 
ment. Our suggestion is for the elimination of 
unnecessary and wasteful competition (italics 
mine*) ; and, speaking only illustratively, it has not 
been my thought at all that if the Commission were 
endowed with the power that is here suggested it 
exercise it to the extent, for example, of permit¬ 
ting consolidation or merger of the New York 
Central system and the Pennsylvania Railroad sys¬ 
tem ; but there may be a good many small roads 
between them, connecting with one or the other 
of them, which it would be in the public interest 
to have one or the other of them absorb and make 
it part of a big healthy member of society. 

“Senator Kellogg: I do not understand that you 
believe that all competition as to service between 
the great carrier lines of this country should be 
eliminated ? 

“Commissioner Clark: Not at all, Senator. 

“Senator Watson: No.”t 

(c) A New Jurisprudence . 

A New Jurisprudence has grown up in America under 
which right and justice have been sanely, quickly, and 
cheaply meted out through modern administrative tri¬ 
bunals—and it has been the highly successfully work of 
the Interstate Commerce Commission that has pointed 
the way. The Panama Canal Act, the Federal Trade 

*The term “italics mine” means that the italics are those of the 
undersigned. 

fThe formal memorandum submitted by Mr. Clark on behalf of the 
entire Commission except Mr. Commissioner Woolley (p. 235), stated: 
“Obviously competition between carriers that is wasteful or unneces¬ 
sarily expensive lays an added burden upon the rate payers. Elimina¬ 
tion of wasteful or unduly expensive competition in rates or service is 
desirable ” The colloquy quoted in the text (in that it deals with both 
undue consolidation and unreasonable competition) is more helpful 
in guiding economic thought than the matter quoted in this footnote, 
although the latter very aptly supplements the former. 



4 


Commission Act, the Clayton Act, the 1916 Amendment 
to the Federal Reserve Act, the Shipping Board Act, 
and the Webb-Pomerene Act have followed in its wake. 

The time has come when society recognizes! that 
reasonable cooperation and consolidation, and rational 
competition can be brought about by being limited, 
regulated and controlled by duly established administra¬ 
tive bodies. Neither reasonable cooperation and consolida¬ 
tion nor rational competition should be destroyed by hard 
and fast rules of law whose principal sanctions are grand 
and petit juries and penal institutions. 

( d) Extent of Regulation. 

“Government regulation of corporations engaged as com¬ 
mon carriers,” says Mr. Clark (p. 232), “should reach the 
corporate activities wherever those activities may lawfully 
go in serving the public as interstate carriers.” 

(e) Complete Merger in Time of War. 

Mr. Clark wisely suggests that Congress should now (p. 
232) provide by law for the prompt merger of all carriers’ 
lines, facilities and organization into' a continental and uni¬ 
fied system in time of war under which the President should 
be authorized to assume possession and control and operate 
same. It is suggested by the undersigned that such law 
provide that in exercising such power the President should 
do so through the existing corporate organizations as his 
agencies. 

Mr. Clark goes still further and suggests (pp. 232-3) the 
giving of such power in times of national stress or emer¬ 
gency not growing out of war. The wisdom of this sug¬ 
gestion is open to the gravest question. 

(/) Unnecessary Road Building. 

Interstate railroads should only be constructed when 
necessary and convenient to the public and Mr. Clark points 


5 


out (p. 233) that a certificate of “public convenience and 
necessity” be first secured. 

(g) Power to Require Railroads to Extend Their Lines 

The new legislation (says Mr. Clark) should give the 
Interstate Commerce Commission power to require com¬ 
mon carriers to extend short lines, spur lines and spur tracks 
to communities and industries under reasonable limitations 
(p. 233). 

(h) Fair Wages a Proper Factor in Rate Making. 

That fair wages to be paid labor is conducive to' efficiency 
and a proper factor in rate making is lucidly expounded by 
Mr. Clark (p. 235). 

(i) Wages and Conditions of Employment. 

Mr. Clark expressed the opinion (pp. 239-240) that the 
Interstate Commerce Commission should not be vested with 
power to adjudicate questions of wages and conditions of 
employment but that the Newlands Act is adequate to 
deal with these questions. 

(/) Uniform Depreciation Charge. 

Mr. Clark (p. 240) demonstrated that there could not 
be a uniform depreciation charge because to have such uni¬ 
form depreciation charge would disregard divergent oper¬ 
ating conditions and that the present law is adequate to 
deal with the question. 

(k) Mileage Scales and Grouping. 

Rate making is not a purely mathematical problem but a 
commercial one in which economic factors must be con- 


6 


sidered. Mere mathematical rate making is not of itself 
scientific rate making and no rate making is truly scientific 
which does not consider the actual affairs of commercial 
life. It is true there are situations and conditions where 
mathematical rate making is sound economic rate making. 
Every true student of the subject should read with the great¬ 
est care what Mr. Clark had to> say (pp. 241-2) on the sub¬ 
ject of grouping in his testimony ! before the Senate Com¬ 
mittee. 

(/) Initiating Rates. 

The general power to initiate rates should be left with 
the carriers. Experience shows that the Commission should 
also 1 be given power to initiate rates. 

(m) War Expenses. 

The extraordinary cost of conducting the railroads by 
the Government during the war period for war purposes, 
including the abnormal prices paid for additions and bet¬ 
terments made for war purposes should be paid out of the 
public treasury and should not be saddled on the carriers, 
to be in turn borne by the shipper. The new law should 
expressly provide that the railroad should not be bound by 
the unconscionable contract forced upon the railroads by the 
Administration, and that the carriers be bound only to the 
extent of the normal value of such additions and betterments. 
This though it expressed in a dialogue between Senator 
Cummins and Mr. Clark (pp. 284-285) as follows : 

“Commissioner Clark: And whatever course is 
adopted, I do not believe that the Government will ever 
come out of this thing with enough earnings from these 
railroads to pay the obligations which the Government 
must meet as the result of its taking them over. 

“Senator Cummins: I agree that if the Government 
operates the roads, for any inefficiency or want of 


7 


economy that may be found in that operation, I sup¬ 
pose the shippers will have to pay for it; but the roads 
being operated for war purposes, if they do not earn 
the income that is necessary to make good the guaranty, 
it ought to be paid out of the Treasury ancl not ex¬ 
torted from the shippers of the country, ought it not? 

“Commissioner Clark: Under those circumstances, it 
seems to me a very proper part of our war expenses. 

“Senator Cummins: And it is not likely that the In¬ 
terstate Commerce Commision would adjust rates so 
that deficits which were occasioned by war move¬ 
ments would be taken from or made up by the shippers, 
is it? 

“Commissioner Clark: We have never adjusted rates 
on any such principle.” 

It would appear to have been the clear intent and pur¬ 
pose of the Railroad Control Act of March 21, 1918 (40 
Stat., 451) by the provisions of sections 1, 3 and 4, para¬ 
graphs 2 and 3 of section 6, that the war-time cost of addi¬ 
tions and betterments made necessary by war-time condi¬ 
tions should not be saddled upon the railroads but only the 
cost in normal times. The Railroad Administration seems to 
have sought to frustrate the obvious intent and purpose of 
the law by providing in paragraph (b) of section 8 of 
Forms “A” and “B” of April 5, 1919, of the Agreement be¬ 
tween the: Director General of Railroads and the Railroad 
Companies, the following: “Proznded, however, That no 
loss shall be claimed by the Companies and no money shall 
be due to it* in respect of such additions and betterments 
upon the ground that the actual cost thereof at the time 
of construction was greater than under other market and 
commercial conditions and for the purpose of determining 
such controversy the amount paid for any addition or bet¬ 
terment shall be deemed the fair and reasonable cost thereof 
and shall be taken as the basis for such determination.” 


♦“Them” in form “B.” 



8 


(n) Merger of Carrier Lines. 

The second primary thought expressed by Mr. Clark on 
behalf of the entire Commission except Mr. Woolley, is as 
follows (p. 233) : “Merger within proper limits of the car¬ 
riers’ lines and facilities in such parts and to such extent 
as may be necessary in the general public interest to* meet 
the reasonable demands of our domestic and foreign com¬ 
merce. The thought underlying this is that it might become 
necessary or be found desirable in the general public in¬ 
terest to permit, encourage or require carriers within lim¬ 
its as to extent, territory and time to* merge their lines and 
facilities or the operation thereof. The exercise of such 
a power would necessarily be an administrative function.” 

This presents two questions, one as to permissive and the 
other as to compulsive merger. 

As to permissive merger four classes of cases present 
themselves: 

(a) The substantially non-paralleling and, therefore, 
non-competing lines whose consolidation would form a con¬ 
tinuous line; 

( b) The feeding lines originating traffic (p. 274) 
lateral to the trunk lines and, therefore, non-competing; 

(c) The short lines wholly or partially competing, 
whether originating traffic or not; 

(d) The more or less paralleling and therefore com¬ 
peting trunk lines. 

As illustrating class (a) would be the merger of the 
New Haven with the Pennsylvania, as pointed out by Mr. 
Clark (p, 269); or a system extending from the Atlantic 
to the Pacific or from the Great Lakes toi the Gulf (p. 255). 

A merger of class (b) and class (c) with each other or 
with a trunk line as shown by Mr. Clark (pp. 242, 243, 254 
and 255), would be proper and the Sherman anti-trust law 
and the Clayton act should be modified accordingly (p. 243), 


9 


so as not to cover such cases as are approved by the Com¬ 
mission. 

The new law should permit the consolidation of the fore- 
,going classes (a), ( b ) and (c) when found by the Interstate 
Commerce Commission to be in the public interest and what 
has just been said as to the Sherman anti-trust law and 
Clayton act is applicable thereto. 

At this point, however, the line should be sharply drawn 
and the new law should specifically state that no merger or 
consolidation by sale, lease, stock ownership, community 
of interest or otherwise should be permitted as to class (d) 
roads. As an illustration Mr. Clark pointed out (pp. 254 
and 274) that a merger of the New York Central system 
and the Pennsylvania system should not be permitted. 

Mr. Clark presents (p. 255) strong disapproval of any 
regional subdivision of the country or regional merger or 
consolidation of lines. Senator Gore expressed the opinion 
(at p. 255) that such regional systems would be artificial, 
reverse the law of progress and tend toward disintegration 
rather than integration. 

The new law should not only be permissive and encour¬ 
age such mergers with limitations strongly and clearly ex¬ 
pressed against the merger o-f substantially paralleling and 
competing trunk lines in said class (rf), but should provide 
for such compulsory merger of said class (a), (b) 
and ( c ) lines within the constitutional limits of due process 
of law when found by the Interstate Commerce Commis¬ 
sion to be in the public interest. 

Senator Underwood (pp. 273, 274) seems to have thrown 
some confusion into the discussion as to compulsory merger. 
There was some saving grace in the statement of Mr. Clark 
(pp. 274-5) that permissive merger be refused unless a 
willing short line be included in such merger. 


10 


(<?) Common Use of Equipment. 

The law now provides for the interchange of equipment 
in the case of through routes and to be reasonable should 
be on a car for car basis with an appropriate per diem. Each 
carrier in a through route should furnish and be compelled 
to furnish its proportional part of such equipment. Mr. 
Clark suggests (p. 237) the pooling of equipment. The 
pooling of equipment is but another name for the 
common use of equipment. The pooling of box 
cars would seem to be appropriate but the law should 
place close limitations on the pooling of open top cars 
and possibly on other forms of equipment. Not 
only should carriers be permitted to pool box cars, but when 
in the public interest compelled to do> so. If it is thought 
wise to extend the pooling authority to cars other than box 
cars there should not only be permissive pooling but compul¬ 
sory pooling when found in the interest of the public by the 
Interstate Commerce Commission. 

The new law should not merely permit the Commission 
to require carriers to make car service rules a part of their 
tariff publications but the law should make same mandatory. 

(p) Obligation to Furnish Equipment. 

The Interstate Commerce Commission today is without 
power to require a carrier to provide equipment (p. 237). 
The new law should authorize the Interstate Commerce 
Commission to require a carrier to provide and furnish 
equipment both as to quantity and kind—both general and 
special. 

(q) The Private Freight Car. 

Mr. Clark points out that there should be limitations on 
the right of a shipper to< supply a private freight car (p. 
237). The new law should contain detailed rules on this 


11 


subject. The private car owners secure special assignments 
of their private cars and thus secure preferential use of 
locomotives, road bed and terminals, over other competitors 
who do not own private cars. 

(r) Motive Power. 

The new law should give the Commission power to 
require carriers to furnish ample motive power. 

(s) Standardization of Equipment and Motive Power. 

If the new law gives the Interstate Commerce Commis¬ 
sion (p. 237) power over the standardization of equipment, 
the undersigned suggests it should be somewhat limited, anc 1 
so far as cars are concerned the standardization should be 
confined to box cars. It is very doubtful whether it should 
be extended generally to locomotives because the local con¬ 
ditions are so dissimilar that a locomotive of one standard 
of high efficiency in one locality would be of low efficiency 
in another locality. 

( t ) The Common Use of Terminals. 

As to common use of terminals Mr. Clark said (p. 237 ) : 
“A more liberal use of terminal facilities in the interest of 
proper movement of commerce. Here again a broad revi¬ 
sion of the limitations upon co-operative activities among 
the carriers would naturally bring a more liberal use of the 
existing terminal facilities and would undoubtedly bring 
about agreements between competing carriers under which 
existing terminal facilities would be opened to traffic which 
is now and heretO'fore has been excluded. If the regulating 
body is empowered to require adequate: service it could re¬ 
quire the enlargement of terminals, if that action were 
necessary in the public interest, and could require that ter- 


12 


minals be opened to' traffic in so far as is reasonably and prop¬ 
erly in the interests of the commerce of the locality. Where 
this power was exercised, the regulating tribunal would, as 
a matter of course, determine the reasonable compensation 
to be paid to> the owning carrier for the use of its property 
by the carriers or traffic so using that property.” 

The opinion of Mr. Justice Lurton in the St. Louis Ter¬ 
minal Case (224 U. S., 383) is an interesting study of the 
problem and of the question of competition in service (at 
p. 393). 

The carrier should not merely be permitted to' agree to 
the use of terminals in common, but the Commission should 
be permitted by express’ provision of law to 1 require common 
use of terminals and require the building of new and the 
enlargement of old terminals. 

(u) Supervision of Service and Physical Operation. 

That the Interstate Commerce Commission must be given 
full, ample and complete authority over service and physical 
operation of carriers, is most forcefully stated by Mr. Clark 
(pp. 236, 253, 254, 275, 358-360). This is by far one of 
the most important new powers that should be conferred on 
the Interstate Commission Commission. The shippers 
should not fail to see that Congress confers this power in 
the most ample and complete form possible. 

{v)Minimum Rates. 

Mr. Clark argues most convincingly in favor of vesting 
in the Interstate Commerce Commission power to prescribe 
not merely maximum but minimum rates (pp. 234, 235, 367, 
374) and shows that it would thus be placed beyond the 
power of a carrier to upset a reasonable rate adjustment (p. 
235) or kill or keep killed water transportation (p. 234). 


13 


Of course this power should be limited so as not to pre¬ 
vent a carrier from developing traffic, a function pointed out 
by Hadley (Railroad Transportation, p. 17) as the most 
important in American railroading. 

(w) Issue of Securities. 

Mr. Clark has demonstrated (p. 235) that there must be 
an “emancipation of railway operation from financial dic¬ 
tation. 1 This can be accomplished by vesting in the: Inter¬ 
state Commerce Commission power to “regulate” the issue, 
sale, pledge and disposition of securities (pp. 351-2). As 
put by Senator Pomerene (p. 271) and concurred in by 
Mr. Clark (p. 271) to stop the railroad financial poker game. 

(x) Control of Expenditures. 

The full significance of Mr. Clark’s suggestion that the 
new law should provide that the Commission should have 
control over expenditures and funds and that the same 
should not be diverted can not in justice be epitomized and 
should be read in full (Mr. Clark, pp. 245, 246, 247, 351, 
352). 


(y) Interlocking Directors. 

Mr. Clark suggests (p. 236) that the provisions of thc- 
Clayton act be extended as to commcn or interlocking direc¬ 
tors, whether the carrier corporations are or are not com¬ 
petitors. 

(2) Adequate Revenue . 

Adequate revenue is necessary for efficient service (p. 
237). Mr. Clark (pp. 237-8; has expounded this subject 
with wonderful clearness. 'Adequate revenue, however, to 
operate a railroad as an instrument of transportation is quite 
different from th: raising of revenue to pay interest or divi- 


14 


dends on capitalization which capitalization is not entitled 
to interest or dividends (Mr. Clark, p. 249) or to pay rental 
on leases whose terms shock the conscience. 

{z-i ) Pooling of Freight and Division of Earnings. . . 

The pooling of physical equipment, such as box cars, is 
proper. The pooling of freight and a division of earnings 
based thereon is fraught with danger. Pooling of freight 
with a division of earnings, is unlike a merger. Pooling of 
freight with a division of earnings entirely ignores capital. 
A pooling of freight with a division of earnings is. not a 
consolidation of all the activities of a carrier, while on the 
contrary a merger is a consolidation of each and all the 
activities of the carriers involved. A pooling of freight 
with a division of earnings is a hybrid—neither flesh nor 
fowl. A pooling of freight with a division of earnings 
means either no competition of service or unreasonable, 
abnormal and excessive competition in order to make a 
showing for a subsequent division of earnings. 

Congress, by Section 5 of the Act to Regulate Commerce, 
provided as follows: “That it shall be unlawful for any 
common carrier subject to> the provisions of this act to enter 
into any contract, agreement, or combination with any other 
common carrier or carriers for the pooling of freights of 
different and competing railroads, or divide between them 
the aggregate or net proceeds of the earnings of such rail¬ 
roads, or any portion thereof.” Congress thereby tore up 
the pooling of freight and a division of earnings therefrom 
by the roots and branches and what was wise then is wise 
today. 

The memorandum submitted on behalf of the entire In¬ 
terstate Commerce Commission, except Mr. Woolley, does 
not specifically or by name cover the subject of pooling of 
freight and division of earnings based thereon.. 


15 


The following dialogue between Senator Poindexter and 
Mr. Clark should be the subject of careful study (pp. 248-9) : 

“Senator Poindexter: Why could they not be re¬ 
quired, under the power of the Congress, to regulate 
interstate commerce, to* pool their earnings, and divide 
them ? 

“Commissioner Clark: Senator, that would be a 
part of and covered by the suggestion, which we have 
made here of the revision of the limitations upon the 
competitive activities of the carriers. Our suggestion 
is that not only ought there to be opportunity to absorb 
into the larger systems the poor and weak railroads 
that are. unable to furnish the right kind of service, and 
unable to further finance themselves, but that there 
should be a wiping out of the limitations upon the con¬ 
solidation or unification of the carriers’ competitive fa¬ 
cilities and lines, to such extent as may be approved by 
the designated Federal authority after full investigation 
and public hearing, so that everybody may know what 
the proposition is; so that everybody may know what is 
said in support of it; so that everybody may know what 
objections, if any, are advanced; and a report of that 
tribunal or authority, whatever it was, on the sub¬ 
ject would state to the public what ought to be done, 
and why it ought to be done, and there would be no 
public interest injured that we can see. 

“Senator Poindexter: That would remove the 
difficulty you have just mentioned, of having to 
make the rate for both lines, so that the more expen¬ 
sive one should earn a dividend ? 

“Commissioner Clark: Well, I did not go so far as 
to suggest that the more expensive one should earn 
dividends because there are some of them that never 
can earn dividends on their present capital under any 
rate that would be considered. 

“Senator Poindexter: What is your solution of the 
problem you have just mentioned, where the rate would 
be profitable to one road and not profitable to' the 
other? 


16 


“Commissioner Clark: A rate that would give them 
a reasonable return on the property that they devote to 
the public service. 

“Senator Undenvood: If you had the power to fix the 
rate—not a rate that would be reasonable so far as the 
specific charge on a ton of pig iron or a basket of 
feathers is concerned, but a reasonable rate that would 
yield a fair return on the investment in the property 
actually devoted to the public service—the commission 
would discriminate as to> how much of that capital in¬ 
vestment was fictitious and how much of it was real ? 

“Commissioner Clark: Yes.” 

The following colloquy appears in the report of the hear¬ 
ings before the Senate Committee (at p. 243) : 

“Senator Gore: The Interstate Commerce act pro¬ 
hibits pooling. Do you not think that act should be 
modified so that roads which do» not merge or consoli¬ 
date may be permitted to enter into' reasonable pooling 
arrangements ? 

“Commissioner Clark: What I have said would go 
to that proposition also.” 

Mr. Clark has clearly pronounced himself against the 
consolidation of trunk lines such as the New York Central 
and Pennsylvania lines, and in favor of pooling of cars. 
Answers to leading questions such as those put by Senator 
Gore must be carefully weighed. This answer by Mr. Clark 
to this leading question by Senator Gore is not to be taken 
as the final word upon the subject of pooling of freight and 
division of earnings. It is neither merger nor consolidation. 
It is a most dangerous form of arrangement and does not 
carry with it the benefits of a real merger or consolidation 
when each and every activity, financial, operating and traffic 
are indissolvably bound together and interrelated to and de¬ 
pendent upon each other. 


17 


(z- 2 ) Competitive and Non-Competitive Traffic. 

“There would seem to- be no occasion for different 
charges, terminal or otherwise,” said Mr. Clark (p. 236), 
“as between so-called competitive and so-called non-com¬ 
petitive traffic,” if proper limitations are observed. 

(z-j) Transit. 

Within the limitations suggested, Mr. Clark says (p. 236) 
there would be no occasion “for many of the old annoying 
and expensive restrictions surrounding milling and other ser¬ 
vices in transit.” The transit practice tends to the diffusion 
of industry, as pointed out by Mr. Comimissioner Meyer in 
the Fabrication-in-Transit case (29 I. C. C. R., 70, at p. 
76) and is in the public interest as pointed out by Mr. Com¬ 
missioner Prouty in the Foating Cotton case (8 1. C. C. R., 
121, at p. 133), and the law should be amended so that 
transit practices may be widely extended to many new sub¬ 
jects not yet sanctioned by the Interstate Commerce Com¬ 
mission. 


(2-4) Rail and Water. 

Mr. Clark spoke most eloquently (pp. 234, 235, and 255) 
in favor of the development and encouragement of inland 
water ways and co-ordination and articulation (by inter¬ 
ference) of rail and water transportation systems. Ab¬ 
normally low rail rates have been published in the past for 
the avowed purpose of killing water traffic and the law 
now unwisely provides a method of eternal sleep for 
such water transportation. This should be repealed 
and the Commission given power to prescribe mini¬ 
mum rates (p. 234), and thus take a deadly weapon out of 
the hands of the rail carriers. In addition to mandatory 
provisions for joint through rates and divisions thereof, man- 


18 


datory provisions should be enacted for proportional or ex¬ 
water rates applicable to traffic coming from or going to 
the water wavs, whether such traffic comes from a water 
common carrier or a water private carrier, because nearly all 
the heavy bulk traffic such as coal is carried on the inland 
water ways by private carriers. 

(£-5) Routing. 

Mr. Clark’s criticism (p. 243) of absolutely free routing 
is well taken. Section 15 of the Act to Regulate Commerce, 
as amended, ga,ve the Commission power to< prescribe ex¬ 
ceptions and regulations as to* free shippers’ routing in 
one breath, and took it away in the next breath as to routing 
when there is competition over any part of a through route. 
As the great bulk of traffic does move over lines where at 
least a part of the route is competitive the right to make 
exceptions and regulations is nullified. The proviso should 
be repealed and the Interstate Commerce Commission should 
be given full power to prescribe exceptions and regulations 
as to routing whether over competitive or non-competitive 
routes either in whole or in part. 

(£-b) Federal and State Commissions. 

Just as the American people have accepted the principle 
of an indestructible Union of indestructible States., so the 
shipping public is demanding an indestructible Interstate 
Commerce Commission to regulate our national commerce 
and indestructible State commissions to< regulate our purely 
local State commerce. We must not either localize our na¬ 
tional commerce by regional mergers or regional Com¬ 
missioners or nationalize our local commerce by undue in¬ 
terference with State regulation of State local Intrastate 
commerce by the Interstate Commerce Commission. 
Senator Kellogg (at p. 350) asked Mr. Clark, “is it not 
true that very few rate adjustments can be localized,” and 


19 


Mr. Clark answered, “it is true.” Neither one nor the 
other should unduly discriminate against the other. There 
should be enacted into law in express, unmistakable 
written words the principle of the Shreveport case (pp. 353- 
4) and what was said at an earlier date in the case of Wel- 
ton vs. Missouri (91 U. S., 275, Mr. Justice Field at p. 282). 
There is no real difficulty in harmonizing both and establish¬ 
ing a proper relationship between them (p. 236). 

(#-/) The So-Called Weak Roads. 

There has been created an atmosphere of hysteria as to 
the so-called weak roads, largely the result of the activities 
of such organizations as the Association of Owners of 
Railroad Securities. These so-called weak roads have been 
placed, as it were, in an economic aeroplane, “up* in the air,” 
to remove them from close observation. They must be 
brought back “to earth” for closer scrutiny. They must be 
released from the darkened ward wherein are placed sick 
economic patients and brought back into the economic sun¬ 
light for practical common sense treatment. 

The long and loud talk about the so-called weak roads 
has had a physchological effect upon the masses until some 
of the public have lost their balance and acquired delusions, 
illusions and hallucinations in respect thereto. The represen¬ 
tatives of holders of securities in the so-called weak roads 
have shed tears so copiously that emotionalism has made the 
world also weep briny drops. There has been a regular 
economic camp meeting where boisterous shouting has taken 
the place of calm deliberation. 

The so-called weak roads problem has merits and de¬ 
merits. Some phases of the problem are to be solved by 
gentle means and others by the most drastic. 

Mr. Clark shows (pp. 245-6) why we have so-called weak 
roads, as follows: “No railroad has, in my judgment, ever 
been embarrassed financially if the proceeds from the sale 


20 


of its stocks and bonds have been devoted to the develops 
ment of the property. It is the diversion of the proceeds of 
these securities to other channels that leaves the rail¬ 
road with a burden of debt that it can not carry.” Mr. 
Clark pointed out (p. 270) a few roads such as the Rock 
Island, Frisco, C. H. & D., Pere Marquette, Wabash & 
Pittsburgh Terminal, and (p. 269) the New Haven. 

Mr. Clark also stated (p. 249) that: “Well, I did not go 
so far as to suggest that the more expensive one should 
earn dividends, because there are some of them that never 
can earn dividends on the present capital under any rate that 
would be considered.” The same thought had been ex¬ 
pressed by the Supreme Court of the United States in the 
case of Covington Turnpike Co. vs. Sandford (164 U. S., 
578). In this case Mr. Justice Field said (pp. 596-7) : “It 
can not be said that a corporation is entitled, as of right, 
and without reference to the interests of the public, to' realize 
a given per cent upon its capital stock. When the question 
arises whether the legislature has exceeded its constitutional 
power in prescribing rates to be charged by a corporation 
controlling a public highway, stockholders are not the only 
persons whose rights or interests are to' be considered. The 
rights of the public are not to be ignored. It is alleged here 
that the rates prescribed are unreasonable and unjust to 
the company and its stockholders. But that involves an 
inquiry as to what is reasonable and just for the public. If 
the establishing of new lines of transportation should cause 
a diminution in the number of those who need to use a turn¬ 
pike road, and, consequently a diminution in the tolls col¬ 
lected, that is not, in itself, a sufficient reason why the cor¬ 
poration, operating the road, should be allowed to' maintain 
rates that would be unjust to' those who must or do> use its 
property. The public can not properly be subjected to- un¬ 
reasonable rates in order simply that stockholders may earn 


21 


dividends. The legislature has the authority, in every case, 
where its power has not been restrained by contract, to pro¬ 
ceed upon the ground that the public may not rightfully 
be required to submit to unreasonable exactions for the 
use of a public highway established and maintained under 
legislative authority. If a corporation can not maintain such 
a highway and earn dividends for stockholders, it is a mis¬ 
fortune for it and them which the Constitution does not 
require to be remedied by imposing unjust burdens upon the 
public. So that the right of the public to use the defen¬ 
dant’ turnpike upon payment of such tolls as in view of the 
nature and value of the service rendered by the company are 
reasonable, is an element in the general inquiry whether the 
rates established by law are unjust and unreasonable. That 
inquiry also involves other considerations, such, for instance, 
as the reasonable cost of maintaining the road in good con¬ 
dition for public use, and the amount that may have been 
really and necessarily invested in the enterprise. In short, 
each case must depend upon its special facts; and when a 
court, without assuming itself to prescribe rates, is required 
to determine whether the rates prescribed by the legislature 
for a corporation controlling a public highway, are, as an 
entirety, so unjust as to destroy the value of its property 
for all the purposes for which it was acquired, its duty is 
to take into consideration the interests both of the public 
and of the owner of the property, together with all other 
circumstances that are fairly to- be considered in determining 
whether the legislature has, under the guise of regulating 
rates, exceeded its constitutional authority, and practically 
deprived the owner of property without due process of law.” 

That Senator Underwood had similar ideas in mind is 
shown by the following colloquy (pp. 244-5) : 

“Senator Underwood: * * * If the capitaliza¬ 

tion is based on watered stock or fictitious issues of se- 


22 


curities then there is a danger to the property which is 
unnecessary. 

“Commissioner Clark: Undoubtedly.” 

Mr. McCrea, President of the Pennsylvania Railroad, in 
his evidence before the Interstate Commerce Commission 
In the Matter of Proposed Advance in Freight Rates by Car¬ 
riers (Ten Per Cent Case) of 1910,* testified (pp. 2324-25, 
Senate Document No. 725, 61st Congress, 3d Session), as 
follows: 

“Mr. Atwood: Would you think it right for this 
Commission by its order to 1 fix rates and say that as to 
those rates they would tax the shipping community, to 
the end that there might be upheld and maintained a 
railroad that might be in need as the result of malad¬ 
ministration and overcapitalization ? 

“Mr. McCrea: I certainly do> not. I think that a 
road for which there never was any urgent need, which 
was not properly financed, which was not conserva¬ 
tively managed—I do not think that that road should 
have any more consideration than the results of its 
operation would justify.” 

Mr. Clark has pointed out (pp. 245-6) with wonderful 
clearness the disaster resulting from the diversion of the 
proceeds of issued capital and has suggested (p. 245) a 
remedy by a supervision of expenditures. 

Every person at all familiar with the transportation prob¬ 
lem should bear in mind the many cases of disasteri result¬ 
ing from unwise and imprudent issue and diversion of se¬ 
curities and the proceeds thereof and allowing merger and 
consolidation to run wild and the making of unconscionable 
leases and guaranteeing securities where such guarantee 
should not have been given. 

In Consolidations and Combinations of Carriers (July 
11, 1907), 12 I. C. C., 277, the Commission stated (at pp. 


*20 I. C. C. R., 243 and 307. 



23 


300-301) : “Taking the original cost of the property as it 
stood upon the books of the Alton Company December 31, 
1898, as $39,935,887, adding the amount which appears by 
the testimony of Mr. Harriman, Mr. Felton, and Mr. Hil¬ 
lard to' have been spent upon the property out of the new 
capital issued after Mr. Harriman and his associates ob¬ 
tained control of the road, to wit, about $18,000,000 (in¬ 
cluding the cost of the 58 miles of the Peoria road at 
$3,000,000), it shows that the foregoing liabilities of over 
$113,894,000 were placed upon property which had orig¬ 
inally cost approximately fifty-eight millions, or an increase 
of stock and liabilities upon the road for which not a dollar 
of tangible property had been added of practically 
$56,000,000. 

“It was admitted by Mr. Harriman that there was about 
sixty millions of stock and liabilities issued against which 
no property had been acquired, and this is undoubtedly an 
accurate estimate. It further appears by the testimony of 
Mr. Hillard that since the Harriman control has ended and 
the road was turned over to the Rock Island the company 
has been compelled to issue $2,260,000 of car trust notes to 
acquire equipment needed in the business of the company; 
that the present management found the company without 
any money to buy necessary equipment or to build 34 miles 
of railroad which the company had contemplated construct¬ 
ing and on which the Harriman management had placed a 
mortgage, sold the bonds, but had left no funds in the treas¬ 
ury to complete. 

“From this brief synopsis of the exploitation of the 
Chicago & Alton, it is evident that its history is rich in 
illustrations of various methods of indefensible financing. 
First came the profit to the stockholders arising out of the 
sale to themselves of $32,000,000 of bonds at 65, which sold 
for several succeeding years for 82*4 toi 94. Second came 


24 


the 30 per cent dividend based on amounts expended from 
income for improvements, much of it nearly thirty years 
before, and recently capitalized. Third came the psuedo 
transfer to Stanton, and his contract under which the new 
company paid $10,000,000 in cash for preferred stock which 
had cost less than $7,000,000. Fourth came the conversion 
of 183,224 shares of common stock in the Railroad Com¬ 
pany into 195,428 shares of common stock plus 194,890 
shares of the preferred stock in the Railzmy Company, part 
of which was sold to the Union Pacific at 86J4 a share. 
Fifth came the sale of the St. Louis, Peoria & Northern for 
$3,000,000 cash. Sixth came whatever interest the syndi¬ 
cate may have had in the sale to Kuhn, Loeb & Co., of 
$22,000,000 of bonds at 60 cents on the dollar. Seventh 
came the fee of $100,000 to Mr. Harriman for financing 
the enterprise. This analysis is no doubt incomplete, but it 
is suggestive. 

“By way of justification or excuse we are told that the 
methods of the financing of railroads which prevailed in 
the year 1900 are now obsolete, owing to a higher degree of 
conscientiousness among financiers; and moreover, that the 
Chicago & Alton should not be regarded as an isolated in¬ 
stance, inasmuch as it was dealt with much as many other 
roads were at that period. 

“The first of these statements is, we trust, true; the latter 
statement is not calculated to uphold the value of American 
railroad securities.” 

In The New England Investigation (June 20, 1913), 27 
I. C. C., 560, the Commission stated (at page 578) : “June 
30, 1903, the total capitalization of the New Haven Com¬ 
pany was approximately $93,000,000', of which $79,000000 
was stock and $14,000,000 was bonds. The mileage then 
operated was 2,040 miles. On June 30, 1912, the capitaliza¬ 
tion, including stock premiums, was $417,000,000, an in- 


25 


crease of $324,000,000' while the operated mileage was 
2,090, an increase of 50 miles. 

The bonds and notes of the New Haven Company 
had been during this period ordinarily issued at not less 
than par; the stock was sold at considerably above par. 
About $21,000,000 of the stock reported by the New Haven 
Company as outstanding had been in fact issued to the New 
England Navigation Company, one of its subsidiary com¬ 
panies', by which it was held, so that this stock is still vir¬ 
tually in the treasury of the parent company. Disregard¬ 
ing this stock, treating its notes and bonds as issued at 
par, and including the premiums upon the capital stock 
which has actually gone into the hands of the public, the 
New Haven received during the nine years under consider¬ 
ation from the issue of stock and securities about $340,000,- 
000 . 

“While, the New Haven operated 2,040 miles in 1903, it 
only owned of this operated mileage 438 miles. During the 
nine years this owned mileage was increased by about 800 
miles, and the New Haven Company expended approxi¬ 
mately $40,000,000 in acquiring this additional owned mile¬ 
age. 

“It expended during the nine years something over $96,- 
000,000 upon its railroad for betterments and equipment, 
making a, total of $136,000,000 devoted to its railroad 
property proper. 

“This would leave the sum of $204,000,000, which in 
nine years had been expended in operations outside its rail¬ 
road sphere. This fact of itself is a most significant one 
which, standing alone, might well require explanation. At¬ 
tention is here directed to some of the purposes for which 
and the maner in which this vast sum has been invested.” 
The Commission further stated (at pages 616-617) : “In 
conclusion this Commission desires to call attention to one 
lesson from this investigation of national application. 


26 


“No student of the railroad problem can doubt that a 
most prolific source of financial disaster and complication 
to railroads in the past has been the desire and ability of 
railroad managers to engage in enterprises outside the legit¬ 
imate operation of their railroads, especially by the acquisi¬ 
tion of other railroads and their securities. The evil which 
results, first, to the investing public, and finally, to the gen¬ 
eral public, can not be corrected after the transaction has 
taken place; it can be easily and effectively prohibited. In 
our opinion the following propositions lie at the founda¬ 
tion of all adequate regulation of interstate railroads: 

“1. Every interstate railroad should be prohibited from 
expending money or incurring liability or acquiring prop¬ 
erty not in the operation of its railroad or in the legitimate 
improvement, extension, or development of that railroad. 

“2. No interstate railroad should be permitted to lease 
or purchase any other railroad, nor to acquire the stocks 
or securities of any other railroad, nor to- guarantee the 
same, directly or indirectly, without the approval of the 
Federal Government. 

“3. No stocks or bonds should be issued by an interstate 
railroad except for the purposes sanctioned in the two pre¬ 
ceding paragraphs, and none should be issued without the 
approval of the Federal Government. 

“It may be unwise to attempt to specify the price at which 
and the manner in which railroad stocks and securities shall 
be disposed of, but it is easy and safe to define the purpose 
for which they may be issued and to confine the expenditure 
of the money realized to that purpose. That such a measure 
of regulation is necessary, and that it can only be admin¬ 
istered through the national government, is the necessary 
conclusion from the facts developed in this proceeding.” 

In St. Louis and San Francisco 1 Railroad Investigation 
January 20, 1914)) 29 I. C. C., 139, the Commission stated 


27 


(at p. 153) : ‘The policy of the Frisco in the acquisition of 
new lines at prices greatly in excess of construction, costs and 
the sale of its funded debt securities at extravagant rates of 
discount, including the payment of premiums on retired is¬ 
sues and commissions to' banks and bankers on such issues, 
the investment in stocks of industrial companies on which no 
dividends have been paid, the assumption of heavy fixed 
charges for its Texas lines as well as for the Chicago & 
Eastern Illinois Railroad far greater than its returns there¬ 
from, and payment of excessive charges upon the invest¬ 
ment in and use of terminal and coal properties have resulted 
in the net revenue of the Frisco being absorbed by such 
charges in a sum which approximates between $3,500,000 
and $4,000,000 per annum.” 

In re Financial Transactions of the New York, New 
Haven & Hartford Railroad Company (July 11, 1914), 31 
I. C. C., 32, the Commission stated (at page 33) : “The 
result of our research into' the financial workings of the 
former management of the New Haven system has been 
to disclose one of the most glaring instances of maladminis¬ 
tration revealed in all the history of American railroading. 

“* * * The difficulties under which this railroad sys¬ 

tem has labored in the past are internal and wholly due to 
its own mismanagement. Its troubles have not arisen be¬ 
cause of regulation by governmental authority. Its great¬ 
est losses and most costly blunders were made in attempt¬ 
ing to circumvent governmental regulation and to 
extend its domination beyond the limits fixed by law.” 
The Commission further stated (at pp. 68-69) : “This 
investigation has demonstrated that the monopoly 
theory of those controlling the New Haven was 
unsound and mischievous in its effects. To achieve such 
monopoly meant the reckless and scandalous expenditure of 
money; it meant the attempt to control public opinion; cor- 


28 


ruption of government; the attempt to pervert the political 
and economic instincts of the people in insolent defiance of 
law. Through exposure of the methods of this monopoly 
the invisible government which has gone far in its efforts to 
dominate New England has been made visible. It has been 
clearly proven how public opinion was distorted; how offi¬ 
cials who were needed and who could be bought were 
bought; how newspapers that could be subsidized were sub¬ 
sidized; how a college professor and publicists secretly ac¬ 
cepted money from the New Haven while masking as a rep¬ 
resentative of a great American university and as the guar¬ 
dians of the interests of the people ; how agencies of in¬ 
formation to the public were prostituted wherever they 
could be prostituted in order to carry out a scheme of pri¬ 
vate transportation monopoly imperial in its scope/’ 

In re Financial Transactions, History and Operation of 
the Chicago, Rock Island & Pacific Railway Company ( July 
31, 1915), 36 I. C. C., 43, the Commission said (at p. 61) : 
“The property of the railway company will be called upon 
for many years to make up the drain upon its resources re¬ 
sulting from transactions outside the proper sphere in which 
stockholders had a right to suppose their moneys were 
invested.” 

In Pere Marquette R. R. Co. and C. H. & D. Railway 
Company (March 13, 1917), 44 I. C. C., 1, the Commission 
in its summary and conclusion (at pp. 222-223) said: “The 
exploitation in 1903, 1904, and 1905 of the Pere Marquette 
and the C. H. & D. was not an incident of railroad con¬ 
struction. The properties had long been established. 
Whatever control or regulation of the issue of railroad 
securities was exercised by the States in which these roads 
operate was inadequate to prevent the exploiting or to fore¬ 
stall subsequent hasty and unwise reorganization. To the 
extent that these flotations ultimately lodged in the hands 


29 


of innocent investors, whether here or abroad, the public 
was deeply wronged. Whatever control or regulation was 
had of the properties and operations of the two roads was 
not sufficient to keep them in condition to satisfactorily 
serve the population dependent upon them. The result has 
been the same with each, financial disaster to the carriers, 
serious loss to the holders of their securities, deterioration of 
their physical properties, and a marked impairment of 
ability to perform their functions as public servants. 

“Nothing disclosed in the record before us is to be more 
regretted than the readiness of great banking institutions 
in our financial centers to loan enormous sums of money 
upon exceedingly precarious security in aid of such schemes 
as have been devised in the wrecking of these railroads. 
Not only this, but the high officers of such institutions, 
while acting ostensibly as directors of the railroads, have in 
fact been little more than tools and dummies for the pro¬ 
moters. The trustees of other people’s money seem to have 
had little compunction about violations of their trusts for 
the benefit of the promoters, and at their demand. 

“Can the like of what has befallen these two roads be 
made impossible hereafter? Perhaps not entirely, so long 
as financial circles continue complaisant toward financial 
exploitations which prove successful. But it will help if 
minority stockholders are more watchful of their interests 
and if bondholders assert their rights before their security 
fades away for lack of upkeep, purposely neglected in order 
to pay interest and dividends unearned. It would, in our 
opinion, render such exploitation more difficult if the issu¬ 
ance and marketing of all securities of common carriers 
were subject to Federal regulation. As to that we renew 
the recommendations repeatedly made to the Congress in 
our annual reports. We also point to the lesson, here again 
taught, that access to correspondence files is indispensable 


30 


for a thorough and accurate understanding of the motives 
and purposes which underlie the formal entries made in 
accounts and records. 

“Unwise management contributed to the downfall of 
these roads, but breach of trust by corporate officials, often 
for personal gain, was the main cause here, as in the records 
developed in other investigations. * * * That down¬ 

fall, with its deplorable consequences, can be traced only to 
betrayal within, and not to> compulsion from without. 
Neither rivalry, nor rate level, nor regulation, nor all com¬ 
bined, can be found on this record to have contributed in 
any appreciable degree to the disaster.” 

In Wabash Pittsburgh Terminal Investigation (Decem¬ 
ber 17, 1917), 48 I. C. C., 96, the Commission said (at 
page 144) : “The result of the operation of the Terminal to 
date shows clearly that the building of this property was a 
poor business venture. Fifty millions in bonds were issued 
against a railroad 60 miles in length and which cost about 
$25,000,000. The par value of its first mortgage bonds 
alone exceeded by approximately $5,000,000 the actual 
amount of cash expended for property devoted to trans¬ 
portation at the commencement of the receivership. Not¬ 
withstanding the assurance of traffic contained in its traf¬ 
fic and trackage agreements, and the 25 per cent guar¬ 
anty of the Wheeling and Wabash, the Terminal failed to 
secure sufficient tonnage to enable it to pay interest on its 
first mortgage bonds. 

“As has been already shown in detail, the Terminal was 
not only greatly overcapitalized but the percentage of its 
funded debt, 83.04 per cent, to total capital obligations was 
unusually high. Against an actual cash investment in road 
and equipment and securities of affiliated companies of ap>- 
proximately $38,000,000. there was outstanding, when re¬ 
ceivers were appointed, over $61,000,000 in securities. 



31 


“This case illustrates again the great need for control 
of security issues and emphasizes the wisdom of the Com¬ 
mission’s requirement which has been in effect since 1907. 
that the charges to the accounts reflecting the carriers’ in¬ 
vestment in road and equipment shall be based upon the 
cash cost of property.” 

In Proposed Increases in New England (April 16, 1918), 
49 I. C. C., 421, the Commission said' (at pp. 430-431) : 
“In a word, both the present corporate structure and the 
financial history of this so-called ‘railroad’ shows that it 
now is and for some time has been everything that a rail¬ 
road ought not to be. With one of the finest opportunities 
in the world for successful railroading; with a property 
which for years prior to 1903 had been managed conserva¬ 
tively and steadily, if not very progressively, its present 
status is such that neither its present management nor the 
regulating commissions under whose jurisdiction it fab's can 
do anything more than make the roughest kind of guess 
as to their proper course of procedure. It is impossible to 
ascertain and state with even approximate accuracy the 
facts which ought to guide both managers and public offi¬ 
cials to sound and just conclusions. Its condition is the 
result of a decade of atempting to run a great railroad prop¬ 
erty regardless of either ethics or mathematics. See The 
New England Investigation, 27 I. C. C., 560, 607. 

“The following excerpt from our report in Financial 
Invesigation of N. Y., N. H. & H. R. R. Co., 31 I. C. C., 
32, 34, states some of the facts in its career: 

“ ‘Marked features and significant incidents in the 
loose, extravagant, and improvident administration of 
the finances of the New Haven as shown in this investi¬ 
gation are the Boston & Maine despoilment; the ini¬ 
quity of the Westchester acquisition; the double price 
paid for the Rhode Island trolleys; the recklessness 


32 


in the purchase of Connecticut and Massachusetts trol¬ 
leys at prices exorbitantly in excess of their mar¬ 
ket value; the unwarranted expenditure of large 
amounts in “educating public opinion”; the disposi¬ 
tion, without knowledge, of the directors, of hundreds 
of thousands of dollars for influencing public sentiment; 
the habitual payment of unitemized vouchers with¬ 
out any clear specification of details; the confus¬ 
ing interrelation of the principal company and its sub¬ 
sidiaries and consequent complication of accounts; the 
practice of financial legerdemain in issuing large blocks 
of New Haven stock for notes of the New England 
Navigation Company, and manipulating these securi¬ 
ties back and forth; fictitious sales of New Haven 
stock to friendly parties with the design of boosting 
the stock and unloading on the public at the higher 
“market price”; the unlawful diversion of corporate 
funds to political organizations; the scattering of re¬ 
tainers to attorneys of five States who rendered no 
itemized bills for services and who conducted no litiga¬ 
tion to which the railroad was a party; extensive use 
of a paid lobby in matters as to' which the directors 
claim to have no information; the attempt to control 
utterances of the press by subsidizing reporters; pay¬ 
ment of money and the profligate issue of free passes 
to legislators and their friends; the investment of 
$400,000 in securities of a New England newspaper; 
the regular employment of political bosses in Rhode 
Island and other States, not for the purpose of having 
them perform any service but to> prevent them, as Mr. 
Mellen expressed it, from “becoming active on the 
other side,” the retention of John L. Billard of more 
than $2,700,000 in a transaction in which he repre¬ 
sented the New Haven and into which he invested not 
a dollar; the inability of Oakleigh Thorne to account 
for $1,032,000 of the funds of the New Haven in¬ 
trusted to him in carrying out the Westchester propo¬ 
sition; the story of Mr. Mellen as to the distribution 
of $1,200,000 for corrupt purposes in bringing about 
amendments of the Westchester and Port Chester fran¬ 
chises; the domination of all the affairs of this rail- 


33 


road by Mr. Morgan and Mr. Mellen and the abso¬ 
lute subordination of other members of the board of 
directors to the will of these two; the unwarranted 
increase of the New Haven liabilities from $93,000,- 
000 in 1903 to' $417,000,000 in 1913; the increase in 
floating notes from nothing in 1903 to approximately 
$40,000,000 in 1913; the indefensible standard of busi¬ 
ness ethics and the absence of financial acumen dis¬ 
played by eminent financiers in directing the destinies 
of this railroad in its attempt to establish a monopoly 
of the transportation of New England. A combina¬ 
tion of all these has resulted in the present deplorable 
situation in which the affairs of this railroad are in¬ 
volved.’ 

“For present purposes it would not be profitable to un¬ 
dertake a complete analysis of the financial status of the 
New Haven system.” The Commission further stated (at 
pages 433-434) : “But the gist of the New Haven’s 
troubles is found in its so-called 'other investments.’ The 
amount of these is, as already indicated, impossible to state. 
Various computations place them all the way from about 
$150,000,000 to about $227,000,000. The rate of return 
shown on its railroad property is thus necessarily subject 
to variation. Taking the larger figure of $227,000,000, 
the New Haven is receiving an annual average income 
of about 1 per cent on its outside investments; on a large 
part thereof, no income whatever is received. If a part 
of these outside investments be deemed absorbed into the 
railroad property investment, the rate of return on the rail¬ 
road property is diminished proportionately and the re¬ 
turn on the outside investments slightly increased. But 
making due allowance for all these variations and uncer¬ 
tainties, it is nearly accurate to say that the New Haven 
as an investment enterprise has now about $200,000,000 in¬ 
vested in outside properties, yielding a return of less than 


34 


2 per cent per annum. Manifestly, a large part of this 
‘investment’ must be charged off as loss. 

“The representatives of the New Haven would have us 
ignore, or pass very lightly over, the return shown upon its 
property used for carrier purposes. They lay emphasis 
upon the fact that its stockholders fob four years have had 
no dividends ; that the corporation is 1 in grave danger of a 
receivership. They ask us in substance to make good to 
the investors all, or a large part, of the losses incurred in 
the reckless and lawless mismanagement above outlined by 
imposing additional rates upon the patrons of the road. 
This we can not do. Money thrown away, dishonestly or 
with wanton recklessness, or foolishly lost in nonrailroad 
enterprises, is not money put to public use upon which the 
rate payers are bound in law and in conscience to make a 
return. 

“We do not overlook that under our present form of 
corporate management the great majority of the stockhol¬ 
ders in the New Haven enterprise were even more the 
victims of the mismanaging directors than were the patrons 
of the road. It is common knowledge that the directors 
of these great corporations are in fact selected by banking 
or other interests in too many instances actuated by motives 
essentially adverse to the interest of the stockholders 
toward whom they bear a fiduciary relation. But as long 
as our public policy is represented by the law as it now is, 
this Commission must, so far as rate making is concerned, 
hold stockholders responsible for the mismanagement of 
directors who, in contemplation of law, are selected by 
them. Until this Commission, or some other governmental 
body with adequate power, permanently controls the issue 
of carrier securities and, within reasonable limitations, the 
application of the proceeds thereof, stockholders and other 
investors in carrier securities are certain from time to time 


35 


to be subjected to such perils of mismanagement and re¬ 
sultant losses as have accrued to the stockholders of the 
New Haven, the Rock Island, the Pere Marquette, the Cin¬ 
cinnati, Hamilton & Dayton and others. We say this with 
reference to future conditions, not overlooking the ade¬ 
quate, but temporary, safeguards now obtaining under fed¬ 
eral control. 

“After a railroad corporation like the New Haven and 
some of our other well-located and prosperous railroads 
has had a long career of business success and reasonably 
safe management, its stock becomes widely distributed 
among investors who pay little or no attention to' guarding 
their investments. But this situation fraught with grave 
danger to the investing public, is one with which the Con¬ 
gress must deal. As the law now is, this Commission is 
powerless to afford any real remedy for past misdoings 
or in the future to protect other similar bodies of stock¬ 
holders from depredations and losses of an analogous kind. 
We can do no more than investigate and condemn after the 
evil has been accomplished, and make a ‘report’ of losses 
and sufferings which we were powerless under the law to 
prevent. Private capital invested in carrier companies can 
not be generally safe under such lack of security regula¬ 
tion as has existed prior to federal control.” 

“A transportation line,” says Mr. Clark (p. 236), “oper¬ 
ating by virtue of a public grant and upon which the in¬ 
dustrial, commercial and social life of communities depends, 
should not he a football of speculation .” (Italics mine.) 

Mr. Clark (p. 235-6) said: “It would serve no good 
purpose to recite the many instances in comparatively recent 
years in which, through financial deals for which it is difficult 
to find any word of excuse, railroad properties have been 
bankrupted or saddled with almost overwhelming burdens 
of indebtedness, which have not increased the amount or 


36 


value of property devoted to the public service, have not im¬ 
proved the service rendered, and have on the whole had the 
effect of increasing the charges for service (italics mine). 
There should be some way by which under the law these 
things could be prevented, or, if not prevented, by which 
the perpetrators could be required to adequately answer for 
their acts.” 

In the judgment of the undersigned it is very necessary, in 
finding a remedy for the so-called weak roads problem to' find 
out what the evils have been and these are best determined 
by an analysis of some of the situations that have been pre¬ 
sented to the Commission (as late as April 16, 1918) and 
which are found recorded in their reports, copious extracts 
from which have been heretofore quoted. There should, 
therefore, be no misinterpretation of what was said by Mr. 
Clark as above quoted, because the Commission in the fore¬ 
going investigations (in all of which Mr. Clark partici¬ 
pated), pointed out the evils and also specified some of the 
remedies to meet the difficulties. That the only way to pro¬ 
vide a remedy is to study the evils existing, was stated by 
Lord Coke more than 300 years ago in the opinion in Hey- 
don’s Case (3 Coke, 7) decided in the year 1584, wherein 
it is said: “For the sure and true interpretation of all stat¬ 
utes in general (be they penal or beneficial, restrictive or 
enlarging of the Common Law) four things are to be dis¬ 
cerned and considered: 1st. What was the Common Law 
before the making of the Act. 2nd. What was the mischief 
and defect for which the Common Law did not provide. 
3rd. What remedy the Parliament hath resolved and ap¬ 
pointed to cure the disease of the Commonwealth. And 4th. 
The true reason of the remedy; and then the office of all 
the judges is always to make such construction as shall 
suppress the mischief, and advance the remedy, and to sup¬ 
press subtle inventions and evasions for continuance of the 


37 


mischief (italics mine) and pro privato commodo, and to 
add force and life to the cure and remedy, according to 
the true intent of the makers of the Act, pro bono publico” 
Lord Coke there pointed out that the law should be framed 
to “suppress subtle inventions and evasions” devised for 
private interest, and that the law should be interpreted “pro 
bono publico,” that is to say, for the public good. 

The National Association of Owners of Railroad Secu¬ 
rities, through its President, Mr. S. Davies Warfield, pre¬ 
sented a statement; under date of January 31, 1919, and a 
supplemental one under date of February 13, 1919. This 
Association called to its aid a galaxy of eight brilliant law¬ 
yers, including Elihu Root, John G. Milburn, John S. Mil¬ 
ler, Hugh L. Bond, Jr., Forney Johnston, B. H. Inness 
Brown, Luther M. Walter and Samuel Untermyer. 

The thought running through Mr. Warfield’s documents 
is a “leveling of railroad earnings as a whole” (p. 26 of the 
statement of January 31, 1919). The italicised words 
“leveling” and “as a whole” are the italics of Mr. Warfield 
and not of the undersigned. The idea of “leveling” is spoken 
of by Mr. Warfield at several places in the Statement of Jan¬ 
uary 31, 1919 (pp. 5, 26, 29). “Leveling” is but a form of 
socialism, the whole scheme of socialism being to pay the 
rewards of the efficient to the inefficient and take away the 
rewards from the efficient and give them to the inefficient. 
No such socialistic idea should find its way into our national 
law. 

Mr. Warfield states (p. 1 of statement of January 31, 
1919) : “Whether the condition described arose from the ex¬ 
ploitation and mismanagement of certain railroads in years 
past made little difference to present owners of the securi¬ 
ties.” The burden of Mr. Warfield’s statement seems to be 
the matter of a return on the investment made by present 
owners of securities in such securities rather than the in- 


38 


vestment made by railroad corporations in railroad prop¬ 
erty, although Mr. Warfield speaks in many places of a re¬ 
turn to the railroads on the investments made by the rail¬ 
road corporations in railroad property. 

Mr. Warfield states (at p. 2 in the statement of January 
31, 1919) the purpose of his Association: “The purpose 
of the Association was announced that it would do what¬ 
ever it properly could to protect investment made in rail¬ 
road securities by the exercise of the rights belonging to the 
ownership of such securities.” Mr. Warfield thus empha¬ 
sizes the purposes of the Association to be, not so much the 
investment made by the railroad in railroad properties, as 
the investment made by the investors in railroad securities. 
Mr. Warfield further remarked (p. 28 of the statement of 
January 31, 1919) : “The plan will insure a continuation 
of dividends on the stock of railroads.” In this state¬ 
ment the word “insure” is placed by Mr. Warfield in 
bold-faced type. Th e general idea running through 
Mr. Warfield’s statements is a six per cent re¬ 
turn, although Mr. Warfield says in his supplemental 
statement of February 13, 1919 (atp. 11): “It must not 
be understood that any railroad would necessarily receive 
as much as 6 per cent on its property investment account.”' 
The words just quoted are placed in italics by Mr. Warfield. 

That Mr. Warfield had in mind the subject of a return 
on bonds and stocks appears from the following quotation 
from the Supplemental Statement of February 13, 1919 (at 
p. 1) in relation to two methods before the Senate Com¬ 
mittee: “Both methods relate to the form in which the 
net revenue from railroad rates is applied to< the payment of 
a return on their bonds and stocks.” 

That Mr. Warfield had no- idea, of reducing the volume of 
the securities is apparent from the Supplemental Statement 
of February 13, 1919 (at p. 1) as follows: “The other 


39 


method, reducing excess earnings instead of securities, is 
contained in our Plan.” 

That Mr. Warfield’s plan did not involve the reduction 
of securities is apparent from the supplemental statement of 
February 13, 1919 (at p. 2) wherein he said: “Under the 
second or the method we propose, present outstanding bonds 
or stocks remain, but the value of the securities of each rail¬ 
road is dependent upon the actual property they represent 
and the precentage of return each railroad earns entirely 
through its own efforts, earnings in excess of the reason¬ 
able return being taken from it and under rates adjusted 
to the requirements of the Plan we have submitted.” The 
words in italics are the italics of Mr. Warfield and not of 
the undersigned. 

So that there can be no misunderstanding of the plans of 
the National Association of Owners of Railroad Securities, 
as contained in the Statement of January 31, 1919, and the 
Supplemental Statement of February 13, 1919, the student 
of the so-called weak roads problem should read each and 
every line of said Statement and Supplemental Statement 
and read between the lines. When Congress comes to enact 
new legislation, it should keep clearly in mind the mischief 
and defects now existing growing out of the so-called weak 
roads and to use the words of Lord Coke in Fleydon’s case 
(3 Coke, 7) embody language in the law that will un¬ 
mistakably, “suppress subtle inventions and evasions for 
continuation of the mischief.” The admonition of Lord 
Coke given in that case more than 300 years ago (in the 
year 1584) is as sound today as it was then. 

That Mr. Warfield wants Congress to “insure” dividends 
on stock and yet opposes a reduction in capitalization, is 
apparent. This is a most extraordinary proposition in view 
of the notorious fact of over capitilization of the so-called 
weak roads.—whose capitilization is out of proportion to 


40 


the value of railroad property represented thereby. This is 
one of the greatest evils to be corrected by the new law. 

We will now take up an analysis of some nineteen roads 
wherein it will be shown that on the investment cost in 
common stock at about the date of the statement of Mr. 
Warfield of January 31, 1919, that on a return of 6 per cent 
on such investment in common stock, the rate of return will 
range all the way from 18 to 154 per cent. In this analysis 
the investment cost per share, has been taken from the Com¬ 
mercial and Financial Chronicle : 


(1) Chicago Great Western Railroad: 

(a) Par value per share o«f common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 29, 1919. $8.00 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. . 75% 

(2) Denver & Rio Grande Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919.. $3,875 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 154% 

(3) Erie Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919. $16.25 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost.... 36% 











41 


(4) Kansas City Southern Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 30, 1919 . $17.00 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 35% 

(5) Minneapolis & St. Louis Railroad: 

(a) Par value per share of common stock 

new. $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 29, 1919. $10.25 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 59% 

(6) Missouri, Kansas & Texas Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 
on the New York Stock Exchange, lan- 

uary 31, 1919.. .. . $5.00 

(c) Return of 6 per cent. $6.00' 

(d) Rate of return on foregoing investment 

cost. 120% 

(7) New York, New Haven & Hartford Rail¬ 

road : 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 
on the New York Stock Exchange, Tan- 

uary 31, 1919. ... $28.50 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 21% 

(8) New York, Ontario & Western Railroad: 

(a) Par value per share of common stock. . $100.00 















42 


(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919. $20.00 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 30% 

(9) Pere Marquette Railroad: 

(a) Par value per share of voting trust ctfs. $100.00 

(b) Investment cost per share of voting trust 
ctfs. on the New York Stock Exchange, 

January 31, 1919. $13.00 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 46% 

(10) St. Louis-San Francisco Railroad: 

(a) Par value per share of trust ctfs. $100.00 

(b) Investment cost per share of trust 
ctfs. on the New York Stock Exchange, 

January 31, 1919. $12,125 

(c) Return of 6 per cent. .. $6.00 

(d) Rate of return on foregoing investment 

cost. 49% 

(11) St. Louis Southwestern Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 28, 1919. $17.00 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 35% 

(12) Seaboard Air Line Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on: the New York Stock Exchange, Jan¬ 
uary 30, 1919. $8.00 

(c) Return of 6 per cent. $6.00 

















43 


(d) Rate of return on foregoing investment 

cost. 75% 

(13) Southern Railway: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919.;.. $26.75 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 22% 

(14) Texas & Pacific Railroad: 

(a) Par value per share of common stock.. $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919. $33.50 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 18% 

(15) Wabash Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919. $7,875 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 76% 

(16) Western Maryland Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 31, 1919. $10.75 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 55% 

(17) Western Pacific Railroad: 

(a) Par value per share of common stock. . $100.00 















44 


(b) Investment cost per share of common stock 
on the New York Stock Exchange, Jan- 

uary 30, 1919. $18.75 

(c) Return, of 6 per cent... $6.00 

(d) Rate of return on foregoing investment 

cost. 32% 

(18) Wheeling & Lake Erie Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on. the New York Stock Exchange, Jan¬ 
uary 27, 1919. $8,125 

(c) Return of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 74% 

(19) Wisconsin Central Railroad: 

(a) Par value per share of common stock. . $100.00 

(b) Investment cost per share of common stock 

on the New York Stock Exchange, Jan¬ 
uary 28, 1919. $33.50 

(c) Return, of 6 per cent. $6.00 

(d) Rate of return on foregoing investment 

cost. 18% 


In the past the Interstate Commerce Commission has 
dealt in a sensible way with the problem of making rates be¬ 
tween points of origin and destination served by more than 
one common carrier. It is commonly said that the first time 
the matter of a general advance of rates was dealt with was 
in 1910, while as a matter of fact it came before the Inter¬ 
state Commerce Commission in 1903 in the Matter of Pro¬ 
posed Advances in Freight Rates (9 I. C. R., 382). 
This report of the Commission is monumental and one of 
the many great opinions delivered by Mr. Commissioner 
Prouty. In dealing with the precise question here dis^ 
cussed, Mr. Commissioner Prouty said (p. 425) : ‘The 
question now presents itself, must we go further and ex- 











45 


amine the financial showing of other lines in determining 
what rate shall be applied by these lines? The transporta¬ 
tion charge must be the same by all routes. Whatever rate is 
made on grain from Chicago to New York by the Vander¬ 
bilt System must determine the rate between that point and/ 
the Atlantic Seaboard by all routes. Since the fixing of a 
rate upon that system indirectly determines what that 
charge shall be upon all other roads, should we, by reason 
of this indirect effect, consider the condition of those roads ? 

“It might be manifestly unfair fi> select a single advanta¬ 
geous line and make that the standard. We have seen that 
grain can be transported under actual conditions by the Lake 
Shore and the New York Central Railroads from Chicago 
to New York at a cost less than that by most other routes. 
It would be hardly just to these other routes to compel the 
•putting in of a rate upon that line which was reasonable 
with respect to it alone and which had no reference to its 
competitors. Upon the other hand, it would be equally un¬ 
fair to the public if the most expensive line were made the 
standard (italics mine.) The Southern Railway carries 
grain to some extent to Norfolk, Virginia, The distance is 
fully as great; and the rate less, than to New York. Its 
operation is expensive; its tonnage comparatively light; its 
net earnings per mile only about $1,700. A rate to the Sea¬ 
board which upon any fair basis, of compensation to invest¬ 
ment would be reasonable for that company would be ex¬ 
travagantly high for the trunk lines. To permit such a rate 
would be to impose upon the general public the payment 
of an exorbitant charge (italics mine). 

“We are inclined to think that in the present case the pub¬ 
lic is entitled to whatever is a reasonable rate by these two 
great railway systems between the East and the West. The 
New York Central carries one-half of all the grain which 
reaches New York. It carries as far as Albany more than 


46 


one-half that which reaches Boston, and a considerable por¬ 
tion through to destination. The Pennsylvania lines are not 
large carriers of grain to New York, but they transport one- 
half that going to Philadelphia and one-third that taken to 
Baltimore. The great bulk of export grain which moves 
to the Atlantic Seaboard passes out through these four ports; 
and the movement of export grain perhaps roughly indi¬ 
cates that of domestic. Should these carriers he allowed 
to impose upon this vast grain traffic an unreasonable charge 
in order that some other railroad less favorably situated may 
earn dividends for its stockholders” (italics mine). 

The doctrine laid down in the case just cited has been 
reiterated in many others and it will be enlightening to quote 
the first paragraph in the syllabus of the Commer¬ 
cial Club case (19 I. C. C. R., 218) as follows: 
“This Commission has said that in determining a freight 
rate which must of necessity be charged by competing lines, 
it would not look exclusively to that line which could handle 
the business the cheapest or which was the strongest finan¬ 
cially, but would consider as well the weaker rival; yet it 
has never intimated that the rate should be fixed solely with 
reference to the weakest line, and it would certainly be most 
unjust to the public (italics mine), in establishing these 
rates, to consider merely the expensive and circuitous route.” 
The same doctrine was stated in the Receivers’ and Ship¬ 
pers’ Association case (18 I. C. C., R. 440) affirmed by the 
Commerce Court under title of the Hooker case (188 Fed. 
Rep., 242). 

During.the course of the hearing before the Senate Com¬ 
mittee on Interstate Commerce, Senator Cummins inquired 
whether there was any solution for the problem under exist¬ 
ing law and Mr. Clark’s answer to this question led to a dis¬ 
cussion not only as to a solution under the existing law, but 
under such new law as might be framed. The dialogue be- 


47 


tween Senator Cummins and Mr. Clark was as follows 

(pp. 281-282) : 

'‘Senator Cummins: And there was no solution of 
the problem under the existing law, was there? 

“Commissioner Clark: Except as the Commission 
has solved it by saying that it would not fix those rates 
on the basis of the cost of service by the shortest and 
best-equipped line, or the richest line, but would take 
into consideration the needs of the other line. 

Senator Cummins: That is true; and that resulted in 
giving to one railroad more than it ought to have 
viewed from the standpoint that I think most people 
occupy, and giving to another railroad less than it 
ought to have for its service, did it not? 

“Commissioner Clark: I think so; yes. 

“Senator Cummins: Now, the only way in which 
that element in the former problem can be removed is 
by absorption, is it not?—combination of the railroads 
of the country ? 

“Commissioner Clark: That would greatly simplify 
it, because then they could utilize the most economical 
line, and still they would get the earnings of both. 

“Senator Cummins: And you. are a thoroughgoing 
believer in the concentration or consolidation of the 
railways of the country into comparatively few sys¬ 
tems ? 

“Commissioner Clark: I am; yes, sir. 

“Senator Cummins: But you have no hope, have 
you, that the railroads will voluntarily enter into such 
consolidation, doing full justice to the smaller and 
weaker roads? 

“Commissioner Clark: Oh, I think that there would 
be a very strong tendency in that direction and that it 
would gradually grow and that there would be a very 
large number of absorptions and consolidations if it 
were permitted. 

“Senator Cummins: Why not do the thing which 
seems to be necessary, and that will help to 1 accom¬ 
plish the end we have in view, namely, adequate trans- 


48 


portation at the lowest possible cost—and compel the 
consolidations which are necessary to bring about that 
result ? 

“Commissioner Clark: I should not object to that at 
all, although, as I said in response to Senator Town¬ 
send’s question, I have never considered it from that 
standpoint. 

Senator Cummins: I think your answer was per¬ 
fectly sound in one way, but it did not present an ob¬ 
stacle that could not be overcome. 

iC Commissioner Clark: “Oh, no.” 

You can not cure a harelip and you can not supply a leg 
of blood and flesh when a man loses his leg. You 
can, however, improve the appearance of the harelip and 
you can supply a man with a wooden leg. The beauty doctor 
can improve the personal appearance of the deformed and 
the surgical supply man can very much improve the effi¬ 
ciency of the man who has lost his leg. We must help 
the so-called weak roads within the bounds of sound econ- 
nomics and common sense but in doing so we must not 
unduly burden the shipper who in turn passes on the in¬ 
creased cost to the actual consumer. We must not thus 
increase the high cost of living for the sole purpose of pay¬ 
ing dividends on stocks which under no theory of justice 
or principle of public policy ought to be paid. To pay such 
dividends is merely paying a reward for wrong doing and to 
compensate for such torts (the lawyer’s language for 
wrongs). Mr. Justice Holmes (245 U. S., 534) said that 
“in the end the public pays the damages in most cases of 
compensated torts.” 

The recommendations made by Mr. Clark in his testi¬ 
mony before the Senate Committee on Interstate Commerce, 
those made by the Interstate Commerce Commission in its 
annual reports to Congress, the many remedies pointed out 
by the Interstate Commerce Commission in its various in- 


49 


vestigations and decisions and the common sense manner 
in which the interstate Commerce Commission has dealt 
with fixing rates as between various competing lines, will 
go far toward solving the so-called weak roads problem. 

To summarize the suggested remedies as to the so-called 
weak roads and in a measure to enlarge on them, the new 
law should contain provisions as follows: 

(1) To prevent unnecessary railroad building; 

(2) To require railroads to extend their lines; 

(3) Voluntary and compulsory merger of carrier lines 
within the limitations laid down by Mr. Clark that this 
should not extend to the merger or consolidation of more 
or less paralleling and competing trunk lines: 

(4) Voluntary and compulsory pooling of equipment 
within proper limitations; 

(5) Obligation on the part of carriers to furnish equip¬ 
ment; 

(6) Power to- compel carriers to furnish adequate mo¬ 
tive power; 

(7) Power to require standardization of equipment and 
motive power within well-defined limitations; 

(8) Voluntary and compulsory common use of ter¬ 
minals ; 

(9) Most ample, complete and detailed power to super¬ 
vise service and physical operation; 

(10) Power to prescribe both maximum and minimum 
rates; 

(11) Power to regulate the issue, sale, pledge and dis¬ 
position of all securities; 

(12) Power to control all expenditures, including pro¬ 
ceeds from the sale of securities and complete and ample 
power to prevent the diversion of funds; 

(13) That a railroad corporation should be prohibited 
from expending money or incurring liability or acquiring 


50 


property not in the operation of its railroad, or for other 
than legitimate improvement, extension or development of 
that railroad; 

(14) The prohibition of interlocking directors in carrier 
corporations whether competitive or non-competitive; 

(15) Power to prescribe rates to secure adequate revenue 
in the way of a fair return on the fair value of property 
devoted to the public service but not for the purpose of 
raising revenue for the payment of dividends on stock when 
under all the circumstances such stock is not entitled to 
dividends; 

(16) Full power to prescribe exceptions and regulations 
as to routing; and 

(17) The new law should embody therein the rules as 
now applied by the Commission under the present law as 
exemplified In the Matter of Proposed Advance in Freight 
Rates, the Commercial Club case, the Receivers’ and Ship¬ 
pers’ Association case and other similar cases decided by 
the Commission. 

In addition, the new law should contain provisions as 
to the so-called weak roads as follows: 

(1) To empower the Commission to determine what pro¬ 
portion the funded debt and stock should bear to the entire 
issued capital with an express provision that the funded debt 
should not exceed 60 per cent of the entire issued capital; 

(2) The Commission should be given power to take 
steps itself or to proceed in court to compel the reorganiza¬ 
tion of a common carrier so that its entire issued capitaliza¬ 
tion should not exceed the fair value of the property de¬ 
voted to* the public service; 

(3) The Interstate Commerce Commission should itself 
have power to appoint a receiver for a common carrier and 
provide for the form of its reorganization and specify the 
terms thereof. Some people have expressed horror at re- 


51 


ceiverships, but a receivership does not interfere with the 
physical operation of a common carrier. It continues to per¬ 
form its functions as an instrument of interstate commerce, 
although its corporate capital financial management is tem¬ 
porarily suspended. “I do not think,” said Mr. Clark (p. 
270), “that the fact that certain impecunious railroads have 
been forced into bankruptcy affects the credit of a road 
that is financially sound and solvent.” There seems to be 
no reason why the Interstate Commerce Commission should 
not be empowered to appoint a receiver for a common car¬ 
rier when the public interest so* demands. Congress has 
invested the Comptroller of the Currency with power to ap¬ 
point receivers of national banks by Section 9272 of Barnes’ 
Federal Code of 1919, and has made further provisions 
in reference thereto by Sections 9278 and 9279; 

(4) No voluntary reorganization of a common carrier 
should be permitted without being first approved by the In¬ 
terstate Commerce Commision; 

(5) In the case of a receivership of a railroad under 
court proceedings, the Interstate Commerce Commission 
should act as Master in Chancery just as is provided in 
Section 7 of the Federal Trade Commission Act of Septem¬ 
ber 26, 1914. The Commission should be given full power 
to prescribe the terms of reorganization under such receiv¬ 
ership ; 

(6) The Commission should be given power to compel 
the abandonment of the whole or a part of a line conducted 
by a common carrier when not in the public interest; 

(7) The Commission should be given power to cancel 
unconscionable leases imposing undue burdens; 

(8) The Commision should be given power to prevent a 
common carrier entering into any leases or purchasing 
the stock of or assuming the obligations of any other com¬ 
mon carrier and power to cancel same; 


52 


(9) The new law should provide not merely criminal but 
civil liability for directors and officers who divert funds of 
a corporation to purposes other than for which they were 
raised, or who enter into burdensome obligations and guar¬ 
antees and unconscionable leases; 

(10) The Commission should be given power to compel 
a carrier to dispose of securities in its treasury which are 
unnecessary to secure its efficient operation and should su¬ 
pervise the matter of the investment of money in securities 
where such investment is made for the purpose of creating a 
reserve fund when the Commission thinks it desirable that 
a reserve fund should be created; and 

(11) The Commission should be given power to initiate 
rates, and which should supplement the power of the car¬ 
riers to initiate rates,* 

(z-8) Modernizing the Machinery of the Interstate Com¬ 
merce Commission. 

Interstate commerce is our national commerce, and should 
therefore, be administered by a national body. A plan 
has been put forward that the Commission be reorganized 
and regional commissions created. Nothing more unwise 
has ever been suggested, and nothing which would do more 
to destroy confidence in national regulation. 

The passage of the new law increasing the powers and 
functions of the Interstate Commerce Commission will nec¬ 
essarily increase its work and make imperative the enlarge¬ 
ment of its machinery. Under the law as it is today, 
the Commission consists of nine members and is permitted 
to divide itself into sub-divisions of not less than three 
members each. The new law ought to provde for increas¬ 
ing its membership from nine to twelve, so as to enable 
it to work in four sub-divisions. One great fault in the 

*The new act, of course, should contain provisions other than those 
above enumerated as to other subjects than the so-called weak roads. 


53 


present law (and which will become a much graver one 
under the new law), is the absence of a permanent head of 
the Commission. At it is today the Chairmanship of the 
Commission rotates from year to year. The undersigned 
suggests that the Commission shall consist of twelve Com¬ 
missioners of which there shall be one Chief Commissioner' 
and eleven Associate Comimssioners, to be appointed by 
the President and confirmed by the Senate. The new law 
should provide that the Chief Commissioner should be 
selected with special reference to his administrative and 
executive ability and should enjoin upon the Chief Com¬ 
missioner the special duty of expediting business. The 
present compensation of the commissioners is inadequate 
and the new law should provide a salary of $12,500 a year 
for the Chief Commissioner and $12,000 a year for each 
Associate Commissioner. The law should further provide 
that when a commissioner shall have served not less than 
ten consecutive years and had reached the age of seventy 
years, he should retire upon full pay. The compensation 
of the Secretary of the Commission should be increased 
from $5,000 to $7,500 per year. 

In view of the great activities of the Commission it is 
now imposible, except in rare cases, for a Commissioner or 
Commissioners to hear testimony in person. Every carrier 
and shipper would prefer that a member of the Commission 
should sit in a case. As a consequence, testimony is heard 
usually by a single examiner. In recent years in a great 
number of cases the examiner is required to prepare a ten¬ 
tative report and parties to the proceeding are allowed to 
file exceptions and the case is argued before the Commis¬ 
sion or a subdivision thereof on such exceptions. This 
system is not calculated to bring the best results. The 
law should provide for the appointment by the President 
with the advice and consent of the Senate, of twenty-four 
Deputy Commissioners at a salary of $10,000 each per 


54 


year, with the provision that after not less than ten years 
consecutive service and upon arriving at the age of seventy 
years they should retire on full pay. The law should spe¬ 
cifically provide that in any and all cases where a tentative 
report is to be submitted that the case should be heard by 
three Deputy Commissioners. To their tentative report, of 
course, exceptions could be filed, and the matter presented 
to the Commission as is now the practice. 

The idea of Deputy Commissioners was suggested by 
Senator Kellogg and Mr. Clark saw in it great possibilities 
as is shown by the following colloquy (p. 349) : 

“Senator Kellogg: Let me ask you right there, Mr. 
Clark, if I do> not interrupt you, what do you think of 
the plan for the Commission having certain subsidiary 
officers or commissioners, if I may call them such— 
not commissioners having the same authority that you 
have, but representing the commission in different 
parts of the country—to> whom people could appeal 
for relief, or to state their grievances, or lay before 
the local commissioners things that they wanted reme¬ 
died? 

“Commissioner Clark: I have thought some of that 
and am thinking some of it now, Senator, and I think 
that plan contains possibilities of great helpfulness and 
great good, if we can get the right men ” (Italicsmine.) 

These Deputy Commissioners should be men as fully 
qualified as members of the Commission. They should 
be mature men of the world just as are the commissioners. 
The cases presented to the Commission are of nation-wide 
importance and set nation-wide precedents, and it is ask¬ 
ing too much that an examiner of the Commission should 
alone hear and submit a tentative report in a case. It may 
be suggested that the examiner might confer with other 
examiners or with a member of the Commission, but such 
other examiners or member of the Commission has not 


55 


heard the case. Primarily the evidence should not be pre¬ 
sented to one human mind but should be presented to three 
Deputy Commissioners, so- that the case may be looked at 
from the various attitudes of various minds. Mr. Clark 
was opposed to placing the rate making power in the hands 
of a cabinet officer on this ground and his objection to a 
cabinet officer fixing rates would apply equally to rates 
being primarily acted upon by a single examiner. The fol¬ 
lowing dialogue brings out the idea (p. 257) : 

“Senator Watson: Has your commission considered 
the question of whether or not you favor one man at 
the head of the railroad transportation system of the 
country, with a place in the Cabinet? 

“Commissioner Clark: Yes; we have talked on that. 

“Senator Watson: May I ask what are your views 
about that ? 

“Commissioner Clark: Well, I do- not think that 
is a desirable plan. 

“Senator Watson: Why? 

“Commissioner Clark: It was suggested the other 
day by the Director General that one man could make 
up his mind somewhat quicker than a commission:— 

“Senator Watson (interposing): Yes; and that is 
the reason I am asking you the question. 

“Commissioner Clark: And there is no doubt that 
if you have a man who has the capacity for making 
up his mind at all, he can make up his mind more 
quickly than can several men; but we think that sev¬ 
eral minds studying a question, and zvith an effort to 
bring their originally conflicting views into harmony, 
and considering the views of each other, are much 
more calculated to reach the right result (Italics 
mine.) 

(^-p) Interpretation, Construction and Application of the 

Act. 

The general rules of law which in the past have con¬ 
trolled the interpretation, construction and application 



56 


of statutes have too often been linguistic, formal and 
machine-like and not based on practical common sense. 
Mr. Justice Oliver Wendell Holmes, in his classic on the 
Common Law (at page 36) stated that “the law is ad¬ 
ministered by able and experienced men, who know 
too much to sacrifice common sense to a syllogism.” 
It is well to embody this as a rule in the written law as a 
standing admonition and guide. Wurzel (Science of 
Legal Method, at page 333), pointed out that there is 
prevailing a. syllogistic method of applying the law. 
The law should be interpreted, construed and applied 
not so much by dry syllogistic reasoning as by the experi¬ 
ences of business affairs. In the leading Two Hundred 
Chests of Tea Case (9 Wheaton, 430), on the question 
whether low grade black tea was Bohea tea or black tea, 
Mr. Justice Story (at page 439) said: “It would have been 
as dangerous as useless, to attempt any other 1 classification, 
than that derived from the actual business of human life 
(italics mine).” 

It is commonly said that the intention of the law 
should be ascertained from the expressed intention of 
the law-giver, and the law-giver thus referred to* is 
a legislative body. In a democracy such body is merely 
a representative o>f the people and therefore the true under¬ 
lying purposes of the law should not be gathered from the 
legislative body, but from the people whose desires are 
embodied in a statute. Therefore there should be no 
machine-like interpretation, construction and applica¬ 
tion of a statute, but the same should be interpreted, 
construed and applied according to the intention of the 
people, and the purposes should be ascertained in economic 
legislation from the economic thoughts of the people. The 
views here expressed are supported by a number of well 
known writers. Kohler stated (Science of Legal Method, at 


57 


page 189) that statutes are to be interpreted as the products 
of the entire people of which the legislature is but the organ. 
He also said that statutes require interpretation be¬ 
cause they can not be communicated except by words 
and that the thoughts are “concealed under the word as 
under a garment.” He also gave it as his view that 
the thoughts expressed in statutes are by no means 
those of an individual author, but that “they are the 
thoughts of mankind itself which the legislator merely 
has given particular form and expression.” Roscoe Pound 
(Science of Legal Method) said (at page 224) : “In 
the positive stage, the law is regarded not so much as 
something proceeding from the will of the lawgiver, as 
something proceeding from society through him; as 
being the product of economic and social forces work¬ 
ing through him and finding expression in his words. 
Hence the text and the context is no longer held to 
be an all-sufficient, guide.” 

Transportation is an economic service. When per¬ 
formed by a common carrier by rail, or by water-and- 
rail, it is regulated by rules embodied in the Interstate 
Commerce Act which is essentially an economic statute, 
dealing with an economic problem. Such statute, there¬ 
fore, should receive an economic interpretation, con¬ 
struction and application. 

Beard in his Economic Interpretation of the Con¬ 
stitution of the United States (at page 156) calls atten¬ 
tion to the fact that Madison in the tenth number of 
the Federalist pointed out in no uncertain language 
that the first and elemental concern of every govern¬ 
ment is economic and that the chief business of gov¬ 
ernment consists in the control and adjustment of econ¬ 
omic interests and that the “regulation” of these various 


'58 


and interfering interests forms the principal task of 
modern legislation. 

Even without the mandate of a statute the courts 
are beginning to recognize the principle that human 
laws operating as they do upon the layman, are not to 
be interpreted, construed and applied merely by me¬ 
chanical rules, and that the courts should look to con¬ 
ditions shown from other than judicial sources. This 
was exemplified in the case of Muller vs. Oregon (208 
U. S., 412), wherein Mr. Justice Brewer said (at page 
419) : “It may not be amiss in the present case, before 
examining the constitutional question, to notice the 
course of legislation as well as expressions of opinion from 
other than judicial sources (italics mine). In the brief filed 
by Mr. Louis D. Brandeis, for the defendant in error, is a 
very copious collection of all these matters, an epitome of 
which is found in the margin.” This same Mr. Brandeis, 
when he became Mr. Justice Brandeis in delivering the 
opinion of the Supreme Court of the United States in the 
great economic case of Luckenbach vs. McCahan Sugar 
Company (248 U. S., 139, decided December 9, 1918), 
stated (at page 149) that: “It is creditable to the ingenuity 
of business men that an arrangement should have been de¬ 
vised which is consonant both with the needs of com¬ 
merce and the demands of justice.” It is therefore, im¬ 
portant that when Congress comes to re-enact the Inter¬ 
state Commerce Act it should contain within itself a 
rule that that act and all acts amendatory thereof and 
supplementary thereto should be given an economic in¬ 
terpretation, construction and application. 

In addition such, statute should be liberally interpreted, 
construed and applied to carry out its underlying objects 
and purposes. 

When Congress comes to re-enact the Interstate Com- 


59 


merce Act, it should contain within itself for its interpreta¬ 
tion, construction and application, rules as follows: 

(1) That said Act should be given a practical, com¬ 
mon sense interpretation, construction and application; 

(2) That said Act should be given an economic in¬ 
terpretation, construction and application; and 

(3) That said Act should be liberally interpreted, 
construed and applied, so as to carry out its underlying 
objects and purposes; that all cases within its objects, 
purposes, reason and spirit, should be included within 
said Act and that cases within the letter and language 
of said Act but not within its objects, purposes, reason 
and spirit, should be excluded therefrom.* 

( z-io ) Interpretation, Construction and Application of 
Publications. 

The Interstate Commerce Act should contain a pro¬ 
vision that rates, rules, regulation and practices con¬ 
tained in publications by common carriers should be stated 
with certainty and precision, and when not so stated, should 
be interpreted, construed and applied strictly against the 
carriers and liberally in favor of the shipper. 


( z-ii ) The Pomerene-Esch Bill. 

There is reproduced in this volume the Pomerene- 
Esch Bill (by far the best bill so far presented), which 
may well be used as a skeleton on which to build a recodi¬ 
fied and rejuvenated Act to Regulate Commerce. A very few 
parts of this bill should be omitted and much should be 
added. 


*These rules might well be incorporated into all other statutes per- 
tainTng to administrative bodies, whose functions perta.n to econonuc 
subjects such as business, trade and commerce. 



60 


( z-12 ) In Conclusion. 

Mr. Clark is in no way responsible for the views ex¬ 
pressed by the undersigned in this introduction or for the 
interpretation placed on Mr. Clark’s testimony, the under¬ 
signed being personally and solely accountable for both. 
Nearly one hundred per cent of Mr. Clark’s suggestions 
may well be accepted by Congress in enacting the new 
legislation. 

Francis B. James. 


Washington, D. C., April 21, 1919. 



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